Has the Tory Government found a ‘magic money tree?’

Introduction

This note tries to answer a question raised by some non-economist friends: to what extent can Government pay for it’s expenditure by just printing the money? Is there a ‘magic money tree’, and what are the pitfalls and limitations on using it? I have simplified the argument in places, for ease of exposition to a non-technical audience. I have also included some speculation about the political implications. The emphasis is on the concepts – I haven’t done any analysis of the UK data, so the speculation is no more than that.

How does Government finance it’s spending?

Government has three options for financing an increase in spending. It can tax more, it can borrow more, or it can ask the Bank of England to create the money it needs – which sounds like having a ‘magic money tree’.

Government spending financed by taxes is fairly simple to understand. Government takes money from taxpayers and spends it instead – hopefully on purposes that most taxpayers agree are worthwhile.

 If Government finances it’s extra spending by borrowing, the Bank of England sells Government bonds, which takes money out of the economy when those who purchase them reduce their bank balances in order to make payment. When Government spends the money it has borrowed, the situation reverses, as the bank balances of those providing those goods and services increase. There is no overall increase in money supply.

If Government spends without taxing or borrowing to pay for it, what happens is that the Bank of England increases the money supply by raising net credit to Government, with no offsetting reduction in bank deposits held by the private sector: overall money supply has increased. When Government spends the extra money, Government bank balances fall back to their initial level, but private sector bank balances increase as those providing goods and services to Government bank the proceeds. If it is easier to visualise, the effects of this process are exactly the same as if the B of E physically prints extra bank notes for Government to spend.

The Demand and Supply of Money

The Bank of England can create as much money for Government as it wishes. The interesting question is what happens as a result. The answer depends on the relationship of the money supply to real output and the price level.

The money supply consists of commercial bank deposits, plus net credit from the banking sector to Government, plus net foreign assets (foreign exchange reserves held by Bank of England and the banks). Commercial banks are also able to create money:- every time they extend a loan, they create a deposit in the name of the person receiving the loan. The limitation on their ability to create money in this way is that they must keep sufficient reserves to be able to meet the demand from depositors wishing to withdraw their funds. Reserves are normally a tiny percentage of their total assets, most of which are in the form of longer term loans and investments. If customers suddenly wish to withdraw more funds than the bank has provided for, the Bank of England steps in to advance funds to the banks, albeit at a punitive interest rate to discourage the banks from taking unreasonable risks. This happened on a massive scale after the 2008 financial crisis, when banks experienced a high level of withdrawals by customers no longer confident that their money was safe.

An important task of central banks like the Bank of England is to manage the money market in such a way that the commercial banks supply sufficient funding to support economic growth and allow the economy to operate at close to full capacity. If too little money is created, interest rates are pushed up, and investment and economic growth stalls; if too much is created, inflation may ensue, as a result of ‘too much money chasing too few goods.’ The Bank seeks to manage the growth of the money supply by changing the interest rate at which it will lend to the banks, and by buying and selling Government debt in order to either supply more funds to the market, or absorb surplus cash.

We have discussed the supply of money, but what determines the demand for it?

Economists like to decompose national output into real output Q and the price level p. You can think of Q as the physical bundle of goods and services actually produced in a given year, and p as a vector or list of the prices at which they were sold. Every time a good or service is sold, money is transferred from buyer to seller. It is true by definition that the total money supply (M) in a given period equals total output (p times Q)  divided by the number of times each £1 is used, a number that economists call the velocity of circulation of money, or v. This is simply true by definition:

Mv=pQ.

The monetarist economists turned it into a theory by assuming that v is broadly constant in the short term. The assumption that the number of times each £ is used in a year is broadly constant is quite a strong one  -especially in a pandemic when everyone’s ability to spend is quite constrained. It continues to be debated to what extent v is stable, but the key insight is that there is a relationship between the demand for money and the monetary value of national output. The more we produce, the more money we need in order to finance the buying and selling of goods and services. This means that the Government (or, more accurately, the Bank of |England on behalf of Government) can indeed use the ‘magic money tree’ to increase the money supply as demand for money increases.

If we start from a situation where the supply and demand for money are in balance, then an increase in Government spending financed by increasing the money supply will be balanced by an increase in money demand, as Government seeks to buy more goods and services. If there is ample spare capacity in the economy, then real output will expand to meet the increased Government demand. Problems arise if the economy is at or near full employment, and firms are unable to increase their output to meet the extra Government orders.

If there is no spare capacity, then Government will only succeed in obtaining the extra goods and services it needs for it’s expanded expenditure programme if the private sector consumes less. This could happen through a reduction in v – perhaps the private sector saves more, or has to wait because of shortages of critical labour or goods and services. However, a large part of the gap between demand and supply is likely to be met through suppliers increasing prices as they realise that the extra Government demand gives them more bargaining power.

To summarise: if there is no spare capacity, the extra quantity of goods and services that Government wishes to buy can only be supplied if the private sector consumes less. Price increases are the mechanism by which the amount that can be purchased is brought into balance with what is available. Government is only able to secure the increased quantity of goods and services it has planned to purchase by reducing the supply available to businesses and households, just as would have happened if it had financed the spending through taxation. Everyone, including the Government itself, will find that, because of increased prices, planned levels of spending will buy less than expected, and the objectives of the spending will not  be fully achieved.

In a trading economy of course, part of the excess demand can be met by imports. Introducing the external sector to the analysis adds some complications but does not fundamentally alter the picture. If goods and services can be purchased from abroad, there is no capacity constraint. If Government increases it’s spending beyond the ability of the domestic economy to supply, then money will flow out of the country as imports increase and less is available to export.

The country will have to buy more foreign currency in order to buy the extra imports. This will reduce the excess money supply, as £s flow out of the country to foreign suppliers. The increased demand for Euros will change the exchange rate, raising the £ cost of buying a Euro. The excess demand for foreign goods and services will eventually be self-correcting as the depreciation of the exchange rate reduces demand for foreign goods and services, in the same way that inflation frustrates demand for domestically produced output. If domestic demand continues to exceed the capacity of the domestic economy, then foreign holders of UK currency will eventually become wary. Interest rates charged by foreign creditors will increase to reflect the expected rate of decline in the value of the currency. Contracts will be denominated in Euros rather than £s. If continued for too long, the combination of a collapsing exchange rate and public and private debt denominated in foreign currency can eventually lead to unsustainable debt problems as African and Latin American countries found in the 1980s. I am not suggesting that this is a serious risk for the UK, but there is a need to manage domestic demand to be broadly consistent with a sustainable balance of payments position in the medium term.

Economists and central bankers generally discourage Governments from making too much use of money creation to finance their spending. The danger if Government continues to have recourse to the printing press to finance it’s expenditure is that a vicious circle can develop. Firms and households expect prices to continue to rise, and therefore seek to protect themselves by holding tangible assets rather than money, and seeking to adjust their prices and wages to the rate of inflation, building more excess demand into the system. In the jargon, the velocity of circulation can become very high. If not checked, the result can be hyper-inflation, banking collapse, and a retreat into a barter economy. This is not just fanciful theory, there have been plenty of real world examples from Germany in the 1920s to Zimbabwe more recently.

COVID 19 and the Magical Money Tree

The circumstances of the current pandemic in the UK make the risks of financing Government spending through borrowing or through money creation relatively modest, at least in the short term. To understand why, a short explanation of the national accounts will be helpful.

The key concept is that every good or service produced in the UK or any other national economy generates an exactly equivalent income for someone. Labour and capital are combined through a production process to produce outputs that are sold to produce income that is shared between the workers and the owners of the capital. Output consists of investment plus consumption goods, and equals income that consists of consumption plus savings. The output of consumption goods equals consumption expenditure by definition -because consumption goods that are not sold in the period are defined as an investment in stocks . This means that the condition for the supply and demand of goods and services to be in balance is that savings should equal investment. This is true by definition after the event.

The problem occurs when investment plans and savings plans differ. If firms plan to invest more than households plan to save, the physical capacity of the economy to supply the necessary goods and services will be exceeded. The banking system may create the money to finance the investment, but physical supply limits will push up prices and interest rates as firms compete for the available labour and capital equipment, reducing the profitability of investment. Conversely, if savings exceed investment, there will be insufficient demand to fully employ the available labour and equipment. The interest rate may fall, reducing the incentive to save and making investment more profitable. However, there is no guarantee that any positive interest rate exists at which the two can be brought into balance. The key insight of Keynesian economics was that, if the private sector is unwilling to invest the available savings, then Government can step in and restore full employment by spending more, increasing the Government deficit. This was the basis of economic policy from the end of the second world war until the rise of monetarist economics in the 1980s.

The lockdowns and the restrictions that have accompanied the COVI|D 19 pandemic caused a reduction in output in the UK economy, and therefore a reduction in people’s incomes. Government tried to limit the reduction in people’s incomes by measures such as the furlough scheme. Other things being equal, one might have expected the population to try to maintain their expenditure by drawing down their savings and borrowing more. This, combined with increased Government spending, might have resulted in total demand exceeding total output, with inflation the result. That was my expectation, in an earlier blog post. In practice, this did not happen.

Somewhat surprisingly, the lockdown has seen a big increase in household savings. Those towards the bottom of the income distribution have struggled, as have many in the hospitality sector and many self employed. However, those who are retired or remain employed have increased their savings, partly a precautionary response to a less certain future, but mainly the result of frustrated consumption as holidays and recreation plans were prevented by lockdown.  This increase in savings has been accompanied by a reduction in investment. Banks and other financial institutions are reluctant to lend in uncertain times where the viability of firms is unclear. The combination of increased savings and reduced investment came at a time when interest rates were already close to zero.

This puts Government at present in a very strong position to finance a massive Government deficit. The Government stock of debt has reached about 100% of GDP, which is high but by no means unprecedented in our post-war history, while the cost of servicing that debt is very low, due to near zero interest rates. With such uncertainty over the viability of private sector investment, Government looks by far the safest place to invest savings, which means the Government can borrow as much as it likes for next to nothing.

The interesting question is what happens when the current unusual situation begins to unwind. Savings are likely to fall quite substantially as it becomes possible to spend on all of the things that have been denied us during lockdown. Investment will revive as easing restrictions removes the uncertainties that prompted delays to investment plans . The banks are very liquid at present, which means that they are well placed to expand their lending very rapidly if credit-worthy customers come forward. With investment likely to increase and savings likely to fall, it is likely that the economy will experience significantly higher interest rates and some inflationary pressures. This is manageable, but will require the Government to reduce the stimulus to demand represented by it’s greatly expanded deficit. This will partly happen automatically as the need for pandemic support eases and higher output brings in more taxes. However, the pandemic revealed the need to spend a great deal more to rectify long standing problems of insufficient spending on major areas including the health service, social care, and local Government, while the cost of servicing the debt will increase. The danger is that an irresponsible Tory Government intent on winning an election may be unwilling to raise the necessary taxes, and may indeed want to reduce them. With similar problems across the globe, there is a potential risk of a return to relatively high inflation and interest rates that could make debt management more difficult, but it seems a remote possibility at present.

As the economy revives, the demand for money will increase, and Government can in normal circumstances make increased use of money creation to finance it’s spending, without causing inflation. This also has the advantage of limiting the increase in Government debt stock and debt servicing costs. A significant caveat is that this depends on what happens in the commercial banks. If revived confidence leads the banks to greatly expand their lending, something they are well placed to do at present, then the Bank of England will become concerned about excessive money supply growth and inflation. In that situation, the Bank may need to reverse the Government contribution to money supply growth to make room for increased private sector demand . The Bof E will need to sell more Government debt than is required to finance the deficit – turning the public sector money creation into reverse, raising interest rates, and raising the cost of financing the Government deficit.

Political Implications

These strange economic times may also partly explain why a Government that appears to many of us to be hopelessly incompetent has nevertheless maintained a lead in the polls. The massive increase in domestic savings has enabled the Government to spend staggeringly enormous sums without raising taxes, and without causing inflation. Many in the country have improved their financial situation; many others have benefitted from generous support via the furlough schemes, enabling them to survive the pandemic with lower costs than they might have expected.

So far, nobody has had to pay for this generosity. Those who have suffered most are perhaps not Tory voters – and we have seen plenty of gerrymandering efforts to direct more of the available largesse to Tory seats. The incredible wastefulness of the chumocracy has yet to cut through precisely because it appears that nobody has yet been asked to pay for it.

The continuing Tory lead might thus be explained by the goodwill factor of the vaccination drive, and the extraordinary scale of the support to household incomes. This positive view might erode when economic revival puts more pressure on Government finances – but that does not look imminent. For the moment, enough people are positively surprised by the extent to which Government has succeeded in protecting them from a pandemic that the Government is not perceived as having caused. Those who have been paying attention may know that the impact in the UK is far worse than it needs to be, but enough people have had a better pandemic than they were expecting to give Government the benefit of the doubt.

Labour offers a more credible policy mix -but BREXIT means neither party’s vision is achievable

 

The vision of the future offered by the Tories implies, according to the Institute for Fiscal Studies :

 

I. Living standards in 2022 will be no higher than in the pre-financial crisis year of 2007, which means the Conservatives will have presided over the longest period of stagnating incomes since the Napoleonic wars.

 

ii. The poorest third of the population will actually be worse off than in 2007, due to the benefit cuts that have yet to take effect.

 

iii. Further misery will be caused by collapsing public services, as the Tories extend to 12 years the most severe squeeze on the NHS since it was founded in 1947

 

The Labour manifesto offers a less bleak outlook, with significantly higher borrowing to fund investment (something the IFS supports), and higher expenditure on public services funded by taxes on the better off. The Labour vision would imply a role for the state somewhat larger than at present, but in line with other high income countries in Europe.

 

The main IFS criticism is that Labour may need to extend some tax increases beyond the higher income groups that it says it will target, because IFS analysis suggests  that just hitting the very well off will not raise as much as claimed. That need not be a fundamental criticism:- it requires an adult debate when and if Labour are in Government concerning what can be afforded and what levels of taxation the electorate are willing to support in order to secure better services. It might also require some better targeting of expenditure promises – but at least an attempt has been made to cost the Labour manifesto, something that the Conservative manifesto does not do.

 

The bigger problem for both manifestos is that they may not be deliverable if the UK is simultaneously self-harming by proceeding with BREXIT. BREXIT will mean:

 

I. Economic growth is likely to be slower:

 

a. We are in for a prolonged period of uncertainty as to our future trading relationships not just within Europe but in the wider world. Decisions to invest will be delayed, some investments that might have come to the UK will go elsewhere to avoid the uncertainty, some activity will re-locate to the EU.

 

b. There is no evidence to suggest that there are offsetting benefits to growth as a result of looser regulation or lower taxation. Our growth rate within the EU has been comparable to that of Germany and the US and slightly higher than the average of high income countries – so there is no reason to believe that the EU has been holding us back. The fast growing countries are those like China who are still catching up with income levels in the rich countries, and no mature economy can expect to do as well.

 

ii. The budget situation will be even worse:

 

a. Any savings on our contributions to the EU will need to be offset by the cost of existing commitments, and the cost of expensively creating at national level equivalent institutions to those that currently provide needed services at European level (or paying for continued use of EU institutional arrangements). The amount of unnecessary or wasteful expenditure that we pay for is likely to turn out to be a relatively small share of our contribution, outweighed by the higher overheads and duplication of creating UK equivalents from scratch after 50 years without them.

 

b. If we succeed in reducing migration, which seems to be a major demand by those who supported BREXIT, there will be an immediate impact on the budget through the loss of tax revenues the migrants would have paid,  the increased cost of training and recruiting national staff to do jobs nationals were previously unavailable or unwilling to do, and the cost of expensive and inefficient non-solutions like trying to recruit agency staff to cover the gaps.

 

c. The biggest impact of leaving the EU is likely to be felt initially in London and the South East. Those elsewhere in the country can be forgiven for shedding no tears for the wealthy city folk, but the impact on the budget is less easily dismissed, with London and the South East the only part of the country that raises more in taxes than it spends on services. If the impact on London turns out to be significant, as seems worryingly likely, then the effects of a reduced tax surplus will be felt in even less money for supporting public services and paying benefits in the regions.

Whichever party forms the next Government will face severe economic and social problems caused by the unprecedentedly long period of flat incomes and underfunded public services. It seems utterly bizarre that both parties are committed to making these serious problems disastrous by proceeding with a BREXIT that offers no benefits. We are ‘taking back control’ of the ship in order to steer it into the iceberg. Both parties are grossly irresponsible to continue to steer full speed ahead on the current course on the basis that a fairly small majority of the crew thought that it was a good idea almost a year ago.

Why so little BBC coverage of Yemen?

Listening to the Today programme on Radio 4, they found time for a long piece on Emojis, and continuing fact-free speculation about what might be happening to the child abuse enquiry, but nothing at all on Yemen the day after the debate in the Commons. The only explanation I can think of for the continuing neglect is that BBC news values have been corrupted by a desire not to upset the Saudis, the Americans, and our arms industry.

How Labour Can Win

How Labour Can Return to Power

There is a possible route back to power for Labour, based on three strong policy platforms:-

 

i. Remain in the EU

Be the party for the 48% who wish to remain in the EU, and for the many more who are coming to that view as the lies of the leave campaign and the shambles of the negotiation become increasingly obvious.

ii. Reduce Inequality

But also be the party for those who have been left behind by globalisation, many of whom voted Brexit because they had so little to lose. Labour was always the party of redistribution, taxing those who can afford it in order to help those who need support. We need to focus on the hardships faced by so many and tackle head on the inevitable Daily Mail critique that Labour wants to tax ‘hard working families’ to provide handouts to the workshy. The approach cant be just about taxation and benefits, it also concerns investment in infrastructure to support a more balanced distribution of economic growth, less biased towards the South East. But we also need to say explicitly that economic growth is not the only goal, we have to concern ourselves with how the benefits are shared.

 

iii. Invest in public services – including a commitment to adequately fund health and social care.

We spend far less on health than other richer countries including our European neighbours. Comparison with others suggests we already have the most cost effective health system in the world. Meeting rising demand effectively is only possible with more money, something we should be willing to pay for.

 

There are several good answers to the question ‘how do we pay for all this?’:-

Relax Austerity: As argued in a previous blog (’public expenditure cuts:not needed, but very damaging’, https://mickfoster.wordpress.com/) , there is no pressing case for further austerity, and a higher share of public expenditure in GDP is prudent in current circumstances where debt service remains low by historic standards, and is likely to remain so. Without making the further cuts proposed by the Tories, the debt will fall as a share of GDP simply through economic growth at historic rates, and there is also scope for higher taxes, ending our participation in a race to the bottom.

 Better In than Out: If we do not leave the EU, we will save ourselves considerable costs of adjustment and will benefit from rather higher economic growth. This theoretical result from modelling is already being confirmed by the plunge in the value of the pound at the prospect of a hard Brexit.

Stop Tory Vanity Projects: We could liberate some funds for worthwhile public expenditure by changing our priorities – scrap the dubious Hinkley and HS2 projects, and (ideally) the entirely pointless expenditure on Trident.

 

Can this bring Labour back together?

With the exception of the possibly contentious issue of Trident (though I have never understood why such lunacy has support in the party), I would imagine that a platform based on these three pillars could be attractive to most Labour MPs. There will need to be debate based on research to help forge evidence-based compromises on how far to push issues such as redistribution and a more expansionary fiscal policy. The prospect of a reasonable shot at forming a Government should focus minds.

 

What is the alternative?

I doubt if there is one in the short term. I suspect that there will be an opportunity for a no-confidence vote that might prompt a new general election at some stage in the run up to triggering Article 50. The only hope for Labour to be a relevant political actor in that process –or indeed in 2020 – is if it has something distinct and clear to say on the case for remaining in Europe. That is the only issue where there is a real possibility of attracting enough new voters to evict the Conservatives. When the Tory Government seem set on inflicting enormous and irreversible damage to our economy, our society, and our Union, there is a once in a lifetime opportunity to be the party of the sane alternative, attracting voters who would not perhaps normally vote Labour. We must seize that opportunity.

Who is better at managing the UK economy, Labour or the Tories?

Economic Growth under Labour and under the Tories

Looking at the long term economic growth rate under both Tory and Labour Governments since 1950, there is no significant difference between them – it averages 2.6% p.a. during periods of Tory rule, 2.5% per annum under Labour[1].

 

Both parties performed poorly until the 1980s

Comparing the performance of the UK to France, the USA, and the average of high-income OECD countries, the UK economy performed poorly compared to our competitors under both Tory and Labour Governments until the end of the 1970s[2].

 

The conservatives under Thatcher initially presided over a deep recession that caused mass unemployment and extreme misery, but later years did see the UK outperform our competitors on economic growth. Over the 1979-97 period of Tory Government as a whole, however, the GDP increase of 52% under the conservatives was higher than France’s 44% but lagged a long way behind the 63% average of the OECD countries let alone the 70% increase in the USA.

 

The only post-war Government to achieve faster economic growth than the average of all rich countries is the labour Government of 1997-2010[3]. Under labour the economy grew by nearly 30%, whereas the high income countries as a group achieved growth of about 28%. From 1997-2008, Labour consistently achieved high GDP growth with low inflation. During the period, the cumulative increase in national output per head in the UK was greater in percentage terms than in either the US or France. The major and important difference from the Conservatives is that labour achieved this good performance while also distributing the benefits more equitably, achieving major reductions in poverty, especially child poverty.

 

The period of growth came to an end with the global financial crisis. During the global recession from 2008, the cumulative decline in national GDP in the UK was about 4.7% compared to an OECD average of about 3.5%, and about 3% in the US and France. The UK was hit harder because of the far greater relative importance of banking and finance in the UK economy. The recession was not caused by labour economic mismanagement.

 

What is less well recognised in the UK (though acknowledged in other countries) is that the UK performed a really significant role in brokering the necessary international action to save the world financial system from collapse[4]. It is ironic that labour ended up with a reputation for economic incompetence when most international observers would give the UK much of the credit for preventing the global recession being a whole lot worse.

 

Under the Tory led coalition since 2010, recovery in the UK was slow, and (unlike the US) the UK had still not recovered the pre-slump peak level of output per head by 2014. The IMF and other commentators have argued that unnecessarily severe austerity policies have damaged economic growth since 2010[5].France performed even more poorly during the recovery because of the problems of the Euro zone – the decision to keep us out of the Eurozone was another example of sound Labour economic judgement.

Economic Management

Growth is only one aspect of economic management. Another indicator of the skill in economic management is the control of inflation, with both parties accepting that a target of about 2% per annum is appropriate. Although direct responsibility is given to the Bank of England (a significant reform introduced by Labour), Government can make their task much more difficult if it fails to retain good control of its own spending.

 

Recent economic history suggests that Labour has performed better than the Conservatives.

 

Both Labour and Tory Governments struggled to control inflation in the 1970s in the face of multiple oil shocks abroad and industrial relations problems at home. Despite the severity of the recession that it induced through over-tight monetary policy in the early 1980s, the Thatcher Government still struggled with inflation rates above 5% as late as 1991.

 

Under Labour from 1997, the UK consistently enjoyed a benign combination of moderate inflation and economic growth. Only the global financial crisis brought this to an end. As argued elsewhere, this was not caused by labour, nor was the labour Government especially profligate in its spending decisions. It was appropriate to allow some expansion in the budget deficit to avoid a still deeper recession. The debt never approached unmanageable levels. The debt has been far higher than the current level of about 80% of GDP for much of our history, it is easily financed with current low global interest rates, and will come down in relative terms as economic growth is restored-  even without the planned deep cuts in public spending.

Did Labour ‘Tax and Spend’ Excessively?

Another frequent allegation is that Labour Governments tax and spend excessively. Judge for yourself:-

I. The labour Government of 1997-2010 generally spent less than the 38% of GDP level reached in the final years of the previous Conservative administration. There was a brief (and rapidly reversed) expenditure blip to 38.8% in 2005, but the eve of the global economic crisis saw the Government spending the same share of GDP as their predecessors. Tax revenue was a little higher, which could be argued to reflect a prudent policy of avoiding excessive deficit spending in good times.

2. During the global crisis, which required extra expenditure to avoid a deep recession, expenditure peaked in 2009 at 43.6% of GDP. This is higher than the average of the rich OECD countries, but is lower than France (47%) and comparable to Denmark (43%) Italy (42%) and the Netherlands (42%). Those who have suggested that Labour economic policies would lead to disaster might want to contemplate these figures – and the fact that high spending Denmark and the Netherlands score 3rd and 6th in the global rankings of the World Happiness Report.

Conclusion

The conclusion to draw from this analysis is that there is little difference between the two parties in terms of the quality of economic management. If anything, Labour has performed better since 1997, enjoying greater consistency with less ‘boom and bust.’

 

The big difference between the two parties is in how the fruits of economic growth have been distributed. That will be the subject of a future briefing note.

[1] Calculated by the author from Office of National Statistics GDP data.

[2] Based on World Bank World Development Indicators. Re-unification makes a comparison with Germany difficult.

[3] World Bank, world development indicators, analysis by the author

[4] For quotes and analysis see William Keegan, Saving the World”? Gordon Brown Reconsidered , October 2012, ISBN 978-1-907720-56-7

[5] For IMF quotes see, http://www.theguardian.com/business/2013/may/22/imf-uk-economy-verdict-eurozone-osborne

The cuts

I am attaching a short piece on the cuts which I did partly to support the Labour Party campaign in Chelmsford – though the views and accuracy are my responsibility alone.

Public Spending Cuts: Not Needed, but Very Damaging

 

Osborne claims that the cuts are necessary for the future health of the economy.

 

This is not true. They are a choice made by an extreme Government intent on reducing the role of the State in providing essential services and a safety net for those who fall on hard times.

 

Some facts:-

No Need for Austerity

 

  1. Public debt at  about 80% of GDP is not high by historical standards (it was over 200% when the NHS was established, and over 100% for much of our history). If nothing more is done to reduce the deficit, the effects of economic growth and inflation mean that it will fall anyway as a share of a growing economy.

 

  1. Because interest rates are so low (and likely to remain so), the 2.5% of GDP annual cost of servicing the debt is trivial. The Thatcher and Major Governments spent more on debt interest in every year they were in power – but nobody then argued that public spending cuts were needed on the scale currently planned.

 

This is why most economists argue that there is no need for further cuts – and they support the case for maintaining spending. At 43% of GDP, public spending is comparable to the average level in the 1970s. It is slightly above the long term average of 40%, but that is to be expected in a period of sluggish growth when Government needs to maintain spending to boost the economy.

Low Tax and Low Spend means Private Affluence for some –Public Squalor for All

 

Osborne claims he is ‘repairing the roof while the sun shines.’ In fact, the sun is not shining on most of us, and this Government is not repairing anything much at all – as the state of our pot-holed roads and the strains on our health and education services will attest. Private affluence for the few is resting on public squalor for us all.

 

Our World Class NHS is Under Threat

We have public services to be proud of – but they are under threat. As recently as 2014, the Commonwealth Fund rated the UK health care system as the best in the world – based on the quality of care, efficiency, and low cost to patients. We achieve this by spending less than other countries -just 8.5% of our national income on health –compared to 11% in major European countries like France and Germany, and a staggering 16% in the US, which is consistently rated as having the worst health care system in the world.

 

These good results though are threatened by rising costs and an ageing population. If we want to keep our good services, we will need to spend a little more – but the extent of the increased spending required will be less if we maintain our efficient Government funded service free at the point of delivery. Outsourcing of services threatens this – bringing in private providers from the inefficient and expensive US system, and undermining the fundamental features of an NHS which is rightly valued in this country.

 

The Cuts in Mid Essex

 

We can see the results of inadequate public funding in our own home town. One important example is the Mid Essex NHS Trust – which runs Broomfield Hospital. The trust has one of the lowest levels of spending per head of population in the country. In 2012-13, it was £24 mn short of the level that Department of Health guidance says is the minimum necessary to provide a uniform level of service. This is over 4% of total expenditure – and the strains have probably increased since.

 

Given the grossly inadequate funding available, it is not surprising that Broomfield has been rated as requiring improvement in the latest Care Quality Commission report, with urgent and emergency services described as ‘inadequate’. Management and staff will get the blame – but the real culprit is a Government trying to maintain a world class health system on the cheap.

 

Conclusion

The very deep cuts now being enacted by this Government threaten fundamental aspects of our way of life as a caring society that wants and can afford a good standard of public services and amenities. Meanwhile this Government continues to fund Cameron’s vanity projects – preposterously expensive nuclear power from Hinckley Point, new high speed rail links based on questionable economic analysis while the roads are full of potholes, and a nuclear weapons system the purpose of which has yet to be explained other than a desire for Cameron to look more important at conferences.

 

We need to fight the cuts – before the deterioration to our fundamental public sector institutions becomes too extensive to be easily repaired by the next Labour Government.

Mick Foster: economist, drummer, and would-be author

Thanks for visiting my site. I am an economist with more years of experience than I care to admit to, most of it in overseas development, though I have also worked as Chief Economist in the UK Home Office, and had a brief stint in the Cabinet Office. The site contains:-

i. My research and consultancy work on economic development – most of this is available on researchgate.net, but not everyone has access to that.

ii. Discussion of policy issues that interest me, trying to push back against the avalanche of lies and distortions that seem increasingly to taint our politics and our media coverage.

iii. Some of my fiction writing while I figure out how best to get it either published or self-published. Short stories under the heading ‘Lives in Development’ can be seen here https://mickfoster.files.wordpress.com/2015/10/lives-in-development.pdf

iv.  I will also have a theme for the various bands and music events I am involved in, with a few links to where our music can be heard.